Event: HLF reports its Q3 earnings Monday after the close. The options market is implying about a 16% move on the event, much higher than the 4 quarter average of 5% and the 8 quarter average of 3.5%. However, the most recent earnings report in July led to a 13.5% drop.
Sentiment: Only 7 Wall Street analysts cover Herbalife stock, but they have 5 buys, 2 holds, and no sells, with a 12 month price target of $88. Herablife is down 36% year-to-date. Short interest remains very elevated, at 43.5% of the float, with the bulk of that due to Bill Ackman’s own short position. It’s notable that short interest is now near a 1 year high:
Options Open Interest: Open interest is unsurprisingly skewed heavily towards puts, by a ratio of 2.5 to 1. The 1 month average volume has favored puts by a ratio of 1.5 to 1. The bulk of the put open interest is concentrated in Jan15 and Jan16, and partly represents Bill Ackman’s own trades (or bank hedges of his over-the-counter put positions with them).
The Jan15 50 put has over 65k of open interest, and the Jan15 60 and 65 puts both have over 30k of open interest. The Jan16 50 put also has nearly 50k of open interest. In other words, the $50 level is the most important for the options market given the concentrated open interest in Jan15 and Jan16.
Price Action / Technicals: Since HLF’s all-time high in January, the stock has been making a series of lower highs and lower lows:
Granted, the swings up and down have been very volatile, and even if the downtrend continues, it likely won’t be at such a steep angle. However, the downtrend is clearly still in place, even with the recent bounce. The 200 day moving average is now downward sloping, and comes into play around $57.50. $60 is the more important resistance level to watch on the upside.
On the downside, the September low is $38.63. As for $50, that has been a magnet for the past 6 months, and is in the middle of $40 support and $60 resistance.
Volatility: Incredibly, 30 day implied volatility is now at a 1 year high, and that includes the numerous headline-grabbing situations in that period:
This expensive level of options pricing certainly has our attention, as it makes short premium structures much better risk/reward than usual ahead of earnings on Monday afternoon.
Our View: The earnings event itself is not justifying the elevated vol in the options. Likely the option premium buying is based on rumors of a possible settlement with the FTC. Who knows what’s baked into the stock at this point, but if there is no announcement, the stock is likely flat to down on inline earnings. A settlement could obviously spike the stock much higher. With vol elevated though, the risk/ reward of selling the move is quite good, especially since HLF traders and investors are well aware of the various moving parts of the story. We’ll do some more research into event and decide whether it’s worth trying to sell vol into the print. If we do a trade, we’ll update on Monday well before the close.